China Markets Warn Xi More Stimulus Is Needed to Fuel Rally

Ever since President Xi Jinping sought to draw a line under China’s slowdown last month, investors have clamored for him to back up monetary easing with a powerful fiscal stimulus to help fuel one of the nation’s biggest stock rallies in years.

But those who hoped to get an answer on Tuesday were disappointed. The National Development and Reform Commission, China’s economic planning agency, used the government’s first briefing after a weeklong national holiday to announce that a meager 200 billion yuan ($28 billion) in spending would be advanced from next year, after analysts forecast a fiscal package worth as much as 3 trillion yuan in the pipeline.

After surging almost 11% at the open, Chinese stocks lost nearly half their gains. Hong Kong shares had their worst day since 2008, falling almost 10%.

“I don’t know what the chairman of the NDRC was thinking with this,” said Alicia Garcia Herrero, Asia Pacific chief economist at Natixis SA. “Frankly the more they wait to clarify, the worse it can be because people will realize there’s no fiscal side to this stimulus — that it’s all monetary, propping up stocks and so on. And that’s quite dangerous.”

The market reaction showed a mismatch between equity investors and officials in Beijing, who expressed confidence on Tuesday that they would hit an economic growth target of “about 5%” this year. The question now is whether Beijing will stop at reaching that goal or do more to pull China out of a deflationary spiral that threatens greater economic pain in the years ahead.

More measures may yet be coming from Xi. The Ministry of Finance, which is typically tasked with issuing bonds to fund stimulus measures and additional spending, is expected to hold a briefing soon that could deliver the kind of stimulus that markets want to see. Banks including Morgan Stanley and HSBC Holdings Plc expect 2 trillion yuan in stimulus, while Citigroup Inc. put the amount at 3 trillion yuan.

“Policymakers probably don’t feel a lot of pressure to do more just yet,” said Christopher Beddor, Deputy China Research Director at Gavekal Dragonomics, citing the market rally since late September. “But if markets start to slump on no news in the next few days, they will feel compelled to do more.”